Right Thinking from the Left Coast

Tag: Euro

Greece and its European creditors announced an agreement here on Monday that aims to resolve the country’s debt crisis and keep it in the eurozone, but that will require further budgetary belt-tightening that Prime Minister Alexis Tsipras could have trouble selling back in Athens.

The agreement does not guarantee that Greece will receive its third bailout in five years. But it does allow the start of detailed negotiations on a new assistance package for Greece.

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The total commitment of money has not been disclosed. But a document by the eurozone leaders noted that experts had estimated that Greece might need from 82 billion to 86 billion euros more — $91 billion to $96 billion — to shore up its economy, rebuild its banks and meet its debt obligations over the next three years. The document said Greece and its creditors should seek to “reduce that financing envelope,” if possible.

As part of Greece’s commitments, Ms. Merkel said, a fund will be created to use the proceeds from selling off assets owned by the Greek government to help pay down the country’s debt. That fund would be “to the tune of” €50 billion, she said.

Greece will also be required to seek assistance from the International Monetary Fund and to agree to let the organization continue to monitor the country’s adherence to its bailout commitments. The Greek government had resisted a continued role for the I.M.F., seeing the fund’s involvement as unwanted meddling.

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The agreement will call for Greece to raise taxes in some cases, pare pension benefits and take various other measures meant to reduce what critics see as too much bureaucracy and too many market protections that keep the Greek economy from operating efficiently.

In other words, Greece has to do what they’ve always had to do: fix their broken tax system, fix their broken pension system, stop spending money they don’t have, sell off bloated Greek government assets and clean up the corruption.

It’s not clear that this will happen: the Greek parliament still needs to approve it. But it is clear that Greece’s left-wing government has accomplished very little other than making the pain worse for their citizens, all to the cheers and plaudits of comfy Western liberals who see this as some kind of experiment in economics and an opportunity to show those damned austerians what’s what.

The alternative for Greece in exiting the Euro. Virtually the entire American Left, who are apparently fine with the idea of a government weaseling out of its debt, thinks this is a better option. The BBC has a great summary of what a Grexit would mean:

The previous Greek Prime Minister, Antonis Samaras, warned that living standards could fall by 80% within a few weeks of exit.

Unable to borrow from anyone (not even other European governments), the Greek government would simply run out of euros.

It would have to pay social benefits and civil servants’ wages in IOUs (if it pays them at all) until a new non-euro currency can be introduced.

The government would not be able to repay its debts, which now amount to a total of about €320bn (£237bn), most of it owed to European governments and agencies and the International Monetary Fund.

The government would have to impose a freeze on withdrawals and on people taking money out of the country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they get converted into a new currency worth substantially less than the previous one.

In the longer run, Greece’s economy should benefit from having a much more competitive exchange rate.

But the devaluation would not solve underlying problems in the economy, including poor tax collection and a struggle to control government spending.

There is also a real possibility of a surge in inflation.
Tax receipts would probably fall as the economy contracted, so the government might finance spending by printing money.

The likely currency depreciation would also be inflationary. It would make imported goods – which in Greece includes a lot of its food and medicine – more expensive.

That’s just the effect on Greece. It might also encourage other countries like Spain to leave. And worldwide, the effects would be very unpredictable.

That’s what the people glibly talking about a Grexit are contemplating. Seems a steep price to pay so that you can side with the deadbeats against the Germans.

A few weeks ago, I wrote about the Greeks electing Syriza, a hard left-wing party that promised to walk back austerity. Since then, the Greek situation has gotten far worse. They negotiated some slight concessions, but most of Europe — including the other PIIGS — held fast. And Greek tax collection have collapsed as most Greeks assumed, with Syriza in power, that the days of having to pay their bills were over. It hasn’t even been two months and the coalition is already floundering.

Greece will unleash a “wave of millions of economic migrants” and jihadists on Europe unless the eurozone backs down on austerity demands, the country’s defence and foreign ministers have threatened.

The threat comes as Greece struggles to convince the eurozone and International Monetery Fund to continue payments on a £172billion bailout of Greek finances.

Without the funding, Greece will go bust later this month forcing the recession-ravaged and highly indebted country out of the EU’s single currency.

Greece’s border with Turkey is the EU’s frontline against illegal immigration and European measures to stop extremists travelling to and from Islamic State of Iraq and the Levant (Isil) bases in Syria and Iraq.

Panos Kammenos, the Greek defence minister, warned that if the eurozone allowed Greece to go bust it would give EU travel papers to illegal immigrants crossing its borders or to the 10,000 currently held in detention centres.

They’re now trying to walk back those comments so this may just be frustrated rhetoric. But I stand by what I wrote six weeks ago:

Fuck Greece. They’ve gotten tens of billions of dollars in help and their response is to whine and cry because they can no longer live high on the hog on a fraudulent system paid for by other countries. Don’t let them leave the Euro; kick them the hell out. Let inflation and default ruin their economy. Maybe then they’ll figure out that you can’t run a country on bullshit.

You can’t run it on threats either.

(Via Tyler Cown, who has been calling Syriza the Not Very Serious People. We may have to elevate that to the Not Very Sane People.)

Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.

Swiftly backed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a “good bank”.

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalize Bank of Cyprus through a deposit/equity conversion.

I’m not convinced there are any good options on Cyprus. As I said, the idea of taking money out of deposits gives me the screaming willies, even it is “just” uninsured accounts with over 100,000 euros. Long term, the economic effects on Cyprus could be terrible. Their banking system may never recover. The good side, however, is that countries are no longer just getting handouts from the EU. They’re expected to bring something to the table.

Europe is a big mess. Unemployment is still at 9-10% but that’s an average. In Spain, it’s in the 20’s. Among young Spanish people, over half are unemployed. I have no hope they will emerge from the wilderness any time soon without either breaking the union up or centralizing monetary and fiscal policy. But it’s clear that the current system can not be sustained much longer.

As you may have heard, Cyprus is being bailed out by the EU and the terms are rather striking:

The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.

The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

Parliament was due to meet on Sunday to vote on the measure, and approval was far from assured.

This may sound familiar. This scenario — a seizure of savings and investments accounts — has been flogged for about two decades by various pundits who are convinced it will happen in this country. Does the Cyprus bailout indicate this is a possibility? I think it’s proof that it won’t happen, actually.

The depositor haircuts seem to have been necessary to get political support for the deal in the EU–and political support in the EU was necessary because Cypriot banks had assets somewhere in the neighborhood of 8 times the Gross Domestic Product of Cyprus. And just to bring it full circle, the banking system had grown to such grotesque, hypertrophied proportions because Cypriot bank accounts seem to be a favorite of tax-dodging Russian oligarchs . . . which is why it was politically necessary to give depositors such a large haircut.

This is not a situation even remotely comparable to the United States. For one thing, there would be no one to bail us out if the banking sector grew to $120 trillion. For another thing, there is no agency that can compel us to terms of a bailout. For a third, vast amount of the of assets in our banks are not held by shady foreign concerns (right now, the Cypriot government seems to be trying to allow natives to pull out cash while extending the bank holiday so that Russians can’t).

Second, even this relatively small taking (on the scale of the European economy) is triggering a potential disaster. There is a run on Cypriot banks as people try to get their money out. The Euro and European stocks plunged in morning trading. And it’s still touch and go as to whether the legislature will assent to the terms.

So, no, I don’t think this is a “it could happen here” scenario. In fact, at this point, I’m not 100% convinced it’s an “it could happen there” scenario. The reaction of the Cypriots and the markets is a perfect illustration of why this is such a bad idea. And hopefully this will be thrown at the next obscure Lefty twit who suggests the idea in a Congressional hearing and sparks the next round of claims that a savings tax is imminent.

And it’s this time mostly courtesy of our Western European socialist economies that have wasted 2 years trying to pretend they can keep the EU together AND keep their craddle-to-grave socialist nanny states. But alas, the end is near:

For two years now, Eurozone leaders have tried to deny reality, concocting one temporary bailout scheme after another in an effort to sweep Europe’s budget problems under the rug. But this game is nearing its end, says Rupal Ruparel of London-based think-tank OpenEurope.

A crisis that began in countries like Greece that seemed too small to worry about has now spread to countries like Spain and Italy that are big enough to take the whole Eurozone down. The only way to actually solve the problems, says Ruparel, is to acknowledge the facts: “Austerity” programs won’t help countries pay back their debts. Either the whole Eurozone has to combine its fiscal spending–a solution in which German taxpayers would pay for Greece’s deficits–or the debts have to be restructured.

Ruparel believes the “fiscal unity” solution is politically untenable. So that leaves restructuring. A planned restructuring will be painful, Ruparel says, but it will be a lot less painful than a market-forced one. And the sooner Europe’s leaders acknowledge this and get cracking, the better.

We are running out of other people’s money. In Europe they already have massive systems of wealth transfers that would make US demcorats swoon, and yet, they still have not been able to make their nanny states fiscally solvent. Even the Germans are coming to grips with the reality that while on their own they might have lasted a few more decades, the rest of the Eurozone will drag them down in a matter of years if not months.

Get ready for a bumpy ride as the world’s sock markets react to this reality and stocks likely plunge again today. of course, this is all “bad luck” to the collectivists, not the fact that the nonsense they believe in can’t work.

UPDATE: And if the European concerns aren’t enough to make the stock market take a tumble, we get some more ”bad luck”, from team Obama, where the community organizer is now not only trying to blame Wall Street, and not Washington D.C. and himself, for the economic morass we are in, but suggesting we should spend a lot more yet again!. Isn’t the definition of insanity that you are trying to do the exact same stupid shit over and over again, and expecting this time to produce different results?